Aug. 23, 2013

The Michigan Capitol / Jessica J. Trevino/Detroit Free Press

Written by

The Detroit Free Press Editorial Board

As emergency manager Kevyn Orr works to balance the city’s books, restructuring an estimated $18 billion in debt and liabilities, it’s also widely recognized that the city must boost revenues — rebuild its tax base, apply for and receive appropriate federal grants, and better manage and spend the grant monies it already receives.

The city also needs to collect money it is owed: Improved collection of fees, fines and uncollected property taxes would all help the city immeasurably. But the lowest hanging fruit is collection of income tax owed by residents who work outside the city.

Detroit residents pay 2.4% in income tax; nonresidents who work inside the city are taxed at a rate of 1.2%.

Businesses located inside city limits are required to deduct those taxes from their employees’ paychecks, along with state and federal taxes. But suburban employers of city residents aren’t. And that means money the city desperately needs is slipping through the cracks.

That’s where the Michigan Legislature can help. If lawmakers required suburban employers to withhold income tax from Detroit residents’ checks, it would not only benefit the city, but the other 21 cities around the state that levy a municipal income tax.

While about 92% of taxes owed by resident and nonresident workers in Detroit are collected, these so-called “reverse commuters” — about 60% of employed Detroiters — don’t have such a great track record.

A 2010 study commissioned by the city estimated that only about 15% of reverse commuters pay up; this means the city is losing as much as $142 million a year. (The study, conducted by McKinsey & Co., used population estimates given prior to the 2010 U.S. census. That survey showed the city’s population had dropped below even conservative estimates, so McKinsey’s numbers could be off. But we’re still talking millions.)

Last year, we urged the Legislature to take three important steps to help Detroit move forward: Create a Public Lighting Authority, a Regional Transit Authority and require suburban employers to withhold city income tax from employees’ pay. The first two have been approved — and kudos to the Legislature for that — but as for income tax collection, we’re still waiting.

Gov. Rick Snyder has expressed sympathy for this cause (enhancing the city’s income tax collection was even part of the consent agreement signed between the city and the state last year), but he hasn’t pushed the Legislature to take action.

It’s time for that to change. This is a no-brainer. Detroit can’t dig its way out of its financial morass without more revenue. Paying income tax isn’t optional, it’s required. For some residents, calculating and remitting taxes independently may represent a significant financial or accounting challenge. For others — folks who have the resources to use an accountant or tax preparation service — failure to pay is inexcusable.

It’s time for the governor to throw his full weight behind this change; when the Legislature returns, it should adopt such a requirement posthaste.